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Supermarket investors' concerns about the competitive threat from cheaper chains were reignited on Thursday after WM Morrison missed profit forecasts with its guidance for this year, causing the food and drug retail sector to take a big hit.

The Morrisons chain, which is the fourth-largest supermarket in the UK, said that underlying profits would drop to £325-375m this year, less than half of last year's and some 30-40% below analysts' current predictions.

The 'miss' was mainly a result of major new £1bn investment programme over the next three years, which includes permanent price cuts, a new loyalty card and improvements to store layouts.

This investment, according to Chief Executive Dalton Phillips, is in response to "major structural and permanent change" in the UK grocery industry given the "rise of the discounters" over the last few years.

The news came as the retailer unveiled a 13% fall in underlying profits to £785m for the year ended February 2nd on revenues that fell 2% to £17.7bn.

The stock was down over 12% at 204.6p in afternoon trade, trading at levels not seen since 2006.

Meanwhile, larger peers Tesco and J Sainsbury were also trading with heavy losses amid fears that Morrison's actions could spark a price war among the 'Big Four' grocers.

"The fact is that customers want quality, but want to pay less than half price, and this is how Aldi and Lidl are able to make such significant inroads into what was previously the exclusive domain of the 'Big Four'," according to Dafydd Davies, Senior Sales Trader at Prime Wealth Group.

"Morrisons has been hit harder than most in this regard, and while in the medium term it may recover some ground as its online offering grows, for now Aldi and Lidl will continue to take customers and chip away at the share price."

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